Choosing the Right Counterparty in Real Estate

The average person assumes that buying real estate from an individual is about the same thing as buying it from a developer. However, that is not the case.

Even though the property under consideration is the same, the motives and capabilities of the buyer vary vastly. As a result, the deals made will be very different.

This article provides information about the different types of counterparties present in the market and the pros and cons of dealing with them:

Buy/Sell Transactions

Buy/ sell transactions are relatively permanent. This means that they are somewhat difficult to reverse or get out of. Hence, one needs to be a lot more careful of such transactions as compared to the usual rental ones.

Choosing the right counterparty to conduct the deal with goes a long way. Not all counterparties have the same motive, level of information or financial power. Therefore, your inability or ability to negotiate the right deal depends on your choice of opponent as well.

  1. Developers: Developers are the worst counterparty that one can select. This is because developers have deep pockets. Also they have a full time team of people who are engaged in dealing with the marketing of real estate and also its legal aspects. Therefore, if you are trying to negotiate pries with a real estate developer, it is basically David against Goliath. This is because, real estate developers deal with investors like you day in and day out and are more experienced at the game.

    Furthermore, they have the deep pockets required to sustain losses and as such are not likely to panic if you pull out of a deal. Also, their legal teams are capable of creating hidden costs for you that you (a non legal person) will not be able to recognize and avoid.

    That being said, it is not impossible for you to get a bargain from a real estate developer. However, you will only get a bargain when the market as a whole is going down.

  2. Individuals: The next option is to choose individual owners as your counterparty. This option is amongst the most feasible ones because your counterparty is likely to have the same financial power, time and team as you do. As such he/she cannot outnumber or out-power you.

    Also, properties are emotional investments for most people. Therefore, if an individual has listed their apartment or house for sale, one can be rest assured that they are serious about the transaction and need the money. This provides you with an opportunity to negotiate hard as an investor. Also, it is likely that the counterparty may be willing to negotiate and you may end up getting a better deal.

    Most successful real estate investors recommend exclusively searching out for listings posted by individuals and dealing with them. The closer these listings are to their expiry, the better it is! Individual investors usually do not have the patience or the deep pockets required to sustain a stand-off.

  3. Brokers: Brokers form a medium risk counterparty. One is better off dealing with brokers as compared to dealing with developers. This is because brokers do not have the financial capacity that real estate developers do. Neither do they have the marketing or legal teams. Also, since they do not have an ownership in the property, their motive to undertake as many deals as possible.

    One must also understand that their motive is to raise the price as much as possible since they are paid a percentage of the sales proceeds.

    The only advantage that a broker has is that they have superior information network. They see hundreds of deals being closed every week and are better adept at negotiations and have the best information pertaining to current market prices.

Rental Transactions

Rental transactions are easily reversible. One can opt out of a property at a month's notice. Hence, the choice of counterparty in the rental scenario is not as important. However, we have still listed down the options, their advantages as well as their disadvantages.

  1. Corporations: Corporations that usually lease out properties are Real Estate Investment Trusts (REITs) or huge financial institutions.

    These corporations have efficient property management processes in place. Therefore, one is less likely to suffer from breakdowns of utilities and amenities while leasing out from corporations. Also, they want to be competitive and try to price their rents somewhat below the market price. Therefore, if you are a tenant, dealing with a corporation is a good option.

  2. Individuals: Individual landlords do not have their processes in place. Therefore there is a greater chance of leaky faucets and broken windows if you rent out from individuals. Also, their housekeeping facilities may not be up to the mark. To top it up, they may try to charge you higher rents. Therefore it is not advisable to rent from individuals if better options are available. The above points may obviously not be true for all individuals. Some of them may provide the best service at the most reasonable rates.

  3. Brokers: Brokers have the incentive of raising the rents as high as they can because they get paid a percentage of the rents. As a result, if you are looking to lease out, you may approach a broker. However, if you are a tenant, consulting a broker should be your last option.

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Real Estate